Divorce is a complex and often emotionally draining process, where the division of assets comes to the forefront as one of the primary concerns for both parties.
One asset that holds significant value, both financially and emotionally, is the marital home. The equity built up in this home represents not only a substantial financial investment, but also a collection of memories and experiences shared over the years. Because of this, deciding how to divide this equity can be a daunting task.
How is a House Valued in a Divorce?
In a divorce, the valuation of a house involves several key steps. This starts with an independent appraiser who is hired to assess the market value of the home. This process may also include a Comparative Market Analysis (CMA) conducted by real estate agents, comparing the property with similar ones in the area.
The condition of the home and any improvements made are crucial factors in determining its value.
Market conditions, reflecting the current real estate trends, also play a significant role. The house’s value is considered alongside the outstanding mortgage balance. It’s important to consider the ownership details, such as how the home was acquired and whose name is on the deed.
State laws can influence the valuation method, as legal requirements vary. In some cases, refinancing the home is an option, allowing one party to buy out the other’s share. Lastly, the divorcing couple may reach an agreement on a value or a specific process for valuation, which can simplify the process.
Broker Price Opinion (BPO)
A Broker Price Opinion (BPO) is a method used in the real estate industry to estimate the potential selling price of a property.
This process involves a comprehensive analysis of the property, including its location, condition, and market trends by a license real estate broker. The broker compares the property with similar ones recently sold in the area, also known as comps. They consider various factors such as the home’s size, age, features, and any improvements or renovations.
The BPO provides a more cost-effective and quicker alternative to a full appraisal, often used by financial institutions for mortgage-related decisions. It’s valuable in situations like loan modifications, foreclosures, and short sales. While not as in-depth as a traditional appraisal, a BPO offers a reliable estimate of a property’s value in the current market.
What Is “Home Equity”?
The term “home equity” refers to the current market value of the home minus any outstanding mortgage balances or other liens against the property. Over time, as the mortgage gets paid down and hopefully, the home appreciates in value, the equity in the home increases. In a divorce, this equity is considered marital property and is therefore subject to division between both parties.
Understanding the options available for dividing this home equity is crucial for reaching a settlement that both parties are satisfied with. Of course, the chosen method of dividing the home equity will depend on each family’s unique circumstances.
Selling The Home
Selling the home and dividing up the proceeds is often seen as the most straightforward way to address home equity during a divorce. It provides a clean break, enabling both parties to move forward separately, unencumbered by the shared asset.
However, there are several considerations that should be taken into account. The real estate market can significantly impact the selling price, and, consequently, the equity available. Additionally, the cost of selling the home, which will include realtor commissions, closing costs, and other related expenses, will affect the net proceeds.
A mutual agreement to sell the home is also imperative, as without consensus, selling the home could become a contentious issue that complicates the divorce proceedings.
One Party Keeps The Home
In some cases, one party may want to keep the home, especially if children are part of the equation. Under this arrangement, the party opting to keep the home would take the responsibility of buying out the other party’s share of equity.
In this scenario, the other party would either receive regular payments or other assets in exchange.
The party who would like to remain in the home will need to refinance the mortgage to assume full ownership of the property. This option’s feasibility depends on the financial readiness of that party.
Co-Ownership of the Home
Some divorcing couples opt for continued co-ownership of the home, often driven by the desire to provide a stable environment for their children or waiting for a better market. This arrangement necessitates a high level of trust and cooperation between the parties.
It’s important to establish the conditions under which the home will be sold in the future, setting a clear precedent for potential scenarios. Both parties, for instance, may agree to sell the house when the children reach a specific age.
When deciding which option to choose, it is advisable to consult with a family law attorney in South Carolina to understand the implications of each option and to ensure that the division of home equity is handled in a manner that is fair and legally sound.
What is a Cash Out Refinance?
A cash-out refinance in the context of a divorce is a financial strategy where one spouse refinances the existing mortgage on their jointly-owned home to obtain a new mortgage for more than they owe on the house.
The extra money borrowed against the home’s equity is then used to “buy out” the other spouse’s share of the home equity. This allows the refinancing spouse to become the sole owner of the property, while the other spouse receives a lump sum payment as part of the divorce settlement.
This approach is often used when one spouse wishes to keep the family home after the divorce, but needs to compensate the other spouse for their share of the home equity.
It’s important to note that the spouse who retains the home and takes out the new mortgage must be able to qualify for the refinancing on their own, based on their credit score, income, and other financial factors. Additionally, this process should be carefully considered and negotiated as part of the divorce proceedings, with legal and financial advice, to ensure fairness and clarity for both parties.
If you are seeking a consultation with an experienced family law attorney regarding division of property, reach out here.
Resources:
https://divorce.com/blog/how-to-split-house-in-divorce/
https://hellodivorce.com/marital-home/dividing-equity
https://www.nerdwallet.com/article/mortgages/how-to-split-home-value-in-divorce
